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Collections: Turning Your A/R Into Cash

You've developed a product or service that everyone loves. You've marketed it. You've sold it. Now all you need to do is get paid for it. It seems like this should be the easiest step in running a successful business, but as many entrepreneurs quickly find out, this step is actually one of the more difficult ones. It's bad enough that your customers want you to wait 30 days to get paid, but the real problem is, most of them aren't going to pay that bill without a gentle nudge. Welcome to the world of collections.

Getting paid seems simple enough, but having A/R doesn't pay your bills and now you need to convert your receivables into cash. For most people, collections are not fun, and sometimes can be downright awkward. After all, you are asking your customers, who you hope will be long-time, repeat customers, for money. It's like lending a good friend some money, but then they never pay you back. Unfortunately, collections are something that need to be done if you want to get paid, and everybody wants to get paid!

Of course, the question is how do you go about handling collections. Collections aren't something that you can improvise a system for, you need to have a system in place for handling them as well as software for managing them. You need a reliable way of knowing who is past due at any given time, and how far past due they are. If all you do is keep a pile of invoices on your desk, you will spend all of your time just looking through each invoice every day to see if you need to contact a customer or not. You will also want a way of taking notes on the account, after all, if they told you they mailed a check yesterday, there is no need to be calling them today. Plus, there are multiple ways of contacting customers such as emails, faxes, regular mail, as well as phone calls. Of course you don't want to do all of these at the same time, but have a process in place where you do each one according to a particular schedule. In the case of email, fax, and regular mail, your customer may have a particular preference that you need to be aware of.

You also can't just use a one-size-fits-all approach, you need to take a different approach based on the situation with your customer. Is this your first time dealing with a customer, or is it the hundredth time? Is it a family business or a Fortune 500 company? Have they paid other invoices but just skipped one invoice? Was there an issue with the particular order that is causing a delay in payment? Most imprtantly, how past due are they? Certainly there is a big difference between a company that is 5 days late (and perhaps the check will be arriving in today's mail), and a company that is 45 or 60 days late. Even if some of your communications are automated, you need to have multiple options and have your software determine which one is best given the situation.

Collections is a lot of work, and without it, you aren't going to get paid. Most businesses need to hire an extra employee just to manage their accounts receivable. Although even with a dedicated employee, some companies are still going to pay slow, and if you aren't careful and performing credit checks on your customers, you're bound to find a few that won't pay at all.

Nobody ever said that running a business was easy, unless of course they've partnered with a factoring company to manage all of their A/R. When you work with a factoring company, you no longer need to worry about collections as they wil handle all of that for you. Plus, factoring companies have more leverage when it comes to collecting as they probably factor for other vendors who sell to your customer, so if they don't pay your receivbales, they run the risk of losing a handful of their vendors. Not to mention, factoring comapnies report directly to multiple credit rating agencies, meaning that by paying a factor slowly it will have a direct impact on their ability to get credit in the future. However, the best part for you may be the next time you call one of your customers, you won't need to ask them for money, but instead can ask if they would like to place another order.

Factoring however isn't just about collections, there is a lot more to it as well. Your factor will handle all of your credit checking, so you'll no longer need to subscribe to expensive credit rating agencies such as Dun & Bradstreet. Your factor also insures your receivables against non-payment, so even if they can't collect, you aren't out the money. Finally, by working with a factor, they will fund you for your receivables the same day you invoice your customer, giving your cash flow a 30 day boost!

If you want to learn more about how factoring can make your life easier, lower your expenses, and improve your cash flow, give DSA Factors a call today at 773-248-9000.

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